Construction activity still the thorn in the RBA's side

Updated
April 04, 2013 19:09:00

Despite some better-than-expected economic data today, one leading Australian economist says the Reserve Bank still has its work cut out. Retail sales data show consumers kept spending through January and February, and there's evidence the services sector is also turning around. But economists say the lift in building approvals today hides some underlying weakness in the construction sector.

TIM PALMER: The latest consumer figures show the reawakened desire among Australians to spend some of their hard earned, which showed up in January retail figures, has continued through February. Sales figures for the month were up 1.3 per cent.

So can the Reserve Bank now relax? Well, economists say it can't because a key piece of the Australian economic puzzle is still missing.

Here's finance reporter David Taylor.

DAVID TAYLOR: There's no denying it's a solid number. It's also an improvement on January's retail sales result.

Almost $22 billion was rung up at cash registers right across the country in February.

Spending at supermarkets and on groceries was particularly strong and electrical items were also popular purchases that month.

The recent advance in the share market and a boost in household wealth is giving consumers a spring in their step.

Economists say the number is worth celebrating

Adam Boyton is the chief economist at Deutsche Bank.

ADAM BOYTON: We can say that the trend in retail is certainly improving after about two years of fairly dire conditions.

DAVID TAYLOR: And the big question: why?

ADAM BOYTON: I think we are now seeing retail activities start to follow the move higher in consumer sentiment that we've seen over the past six to nine months. That suggests that at least some parts of the economy are seeing that cautious consumer come back in.

DAVID TAYLOR: No doubt too, led by recent cuts to the official cash rate by the Reserve Bank.

But there's another number the Reserve Bank may have really been sweating on today. It's building approvals.

It gives policy makers an idea of how strong housing construction may become.

With today's data showing building approvals up 3.1 per cent for February, almost 13 per cent for the year, economists thought there was even more cause for celebration.

Paul Bloxham is the chief economist of HSBC Australia.

PAUL BLOXHAM: Look I think the housing market is turning around. This is one piece of evidence that we got today that that's happening. We've got other pieces of evidence as well. We know house prices are rising, auction clearance rates are picking up, particularly in Sydney and Melbourne.

DAVID TAYLOR: That all sounds positive, but Adam Boyton says you don't have to drill too far into the numbers to read a very different, more sobering story.

ADAM BOYTON: Although we saw about a 3 per cent rise in approvals today most of that actually reflected a blip up in public sector approvals. That will reverse next month.

The underlying trend in private sector approvals is quite soft and actually tells us that the housing construction recovery that we had been starting to see might actually be at some risk of stalling.

DAVID TAYLOR: If Adam Boyton is right, the Reserve Bank has plenty more work to do.

Last Tuesday the RBA said it was still looking for the housing market and housing construction to fill the growth hole likely to be left by the mining boom.

It seems the jury is still out on whether that will be possible.

Paul Bloxham though says he has seen enough evidence that crucial areas of economic growth are finally gaining traction.

PAUL BLOXHAM: We think the easing phase is over. We think the RBA won't need to cut interest rates any further and indeed the next move might be up and it may come even as soon as before the end of this year.

DAVID TAYLOR: There was also some other data out today on the economy, looking at spending on services within Australia. The latest figures show Australia's services sector continues to shrink. On the upside though, it was an improvement on the previous result.

So it seems the Reserve Bank's interest rate policy is working for some parts of the economy, but finding a way to encourage private builders back to construction sites remains a big challenge for the bank.